13 April 2021
RED alert - Spring 2021 – 4 of 6 Insights
The Court of Appeal has upheld a decision of the High Court that a landlord will not waive its right to forfeit a lease where it has demanded and accepted rent that accrued and was due prior to the breach even if, at the time of demand, it had knowledge of the breach.
In this case, the tenant occupied a small café at the historic Towneley Hall in Lancashire pursuant to a ten-year lease (the Lease) granted by Burnley Borough Council (the Council). The Lease was contracted out of the security of tenure provisions in the Landlord and Tenant Act 1954 (the Act).
Pursuant to the Lease, the tenant agreed to pay rent and insurance rent. Although the rent was payable quarterly, the insurance rent was payable within "7 days of demand". The Lease also contained an absolute prohibition on sub-letting the premises.
On 26 September 2019, the Council issued a demand for insurance rent for the period from 1 April 2019 to expiry of the Lease (the First Invoice) which was payable by 2 October 2019.
The High Court found that after this date, the tenant unlawfully granted a sub-lease of the café to a third party without the Council's knowledge. Importantly, unlike the Lease, this sub-lease was not contracted out of security of tenure and therefore the sub-tenant enjoyed a statutory right to take a new lease directly from the Council upon expiry of the Lease.
Subsequently, on 18 October 2019, the Council became aware of the existence of the sub-lease and consequently served a forfeiture notice on the tenant, threatening to forfeit the lease on the ground that the absolute covenant against sub-letting had been breached.
On 4 November 2019, the Council sent a revised invoice for the insurance rent (the Second Invoice). This invoice had re-apportioned the sum specified in the First Invoice to align with the date on which the Council became aware of the tenant's breach, being 18 October 2019. The Second Invoice was subsequently paid by the tenant on 11 November 2019. The landlord then purported to forfeit the lease by peaceable re-entry on 22 November 2019.
The tenant argued that the landlord had waived its right to forfeit by demanding and then accepting payment of the insurance rent after it had knowledge of the tenant's breach.
The Court of Appeal agreed with the High Court that, on these facts, the Council had not waived its right to forfeit the Lease. In particular, the Court clarified that for a waiver to take place, the landlord must:
In this instance, the sums demanded in the First Invoice fell due on 2 October 2019 which, on the Court's findings, was before the unlawful sub-lease was granted. The First Invoice was also submitted before the Council became aware of the breach on 18 October 2019. As a result, the Court of Appeal concluded that the First Invoice could not amount to a waiver as the Council was demanding sums which fell due before the breach of the alienation provisions occurred and in circumstances where the landlord was not yet aware of the unlawful sub-letting.
The Court also rejected the tenant's argument that the Second Invoice constituted a fresh demand which accrued due after the date of the breach. The Court of Appeal decided that this Second Invoice was nothing more than an indication that the Council was willing to accept a lower sum than previously demanded in the First Invoice. Moreover, the Court held that the Council had also not waived its right to forfeit by accepting payment of the Second Invoice on 11 November 2019 on the basis that the Council was accepting payment of rent which accrued before the date of the breach.
Following the recent extension to the moratorium on forfeiture for non-payment of rent until 30 June 2021, forfeiture may be on the agenda for many landlords who are faced with months of arrears due to the pandemic. Although it will not be possible to forfeit for non-payment of rent until after this moratorium is lifted, many landlords will welcome the clarification offered by this judgment while they consider the possible exercise of their rights of re-entry for other covenant breaches.
Nevertheless, landlords must exercise extreme caution before demanding and accepting payment of any sums due where they are aware of the tenant's breach. In such circumstances, we would always recommend that legal advice is sought at the earliest opportunity before taking any further action.
by Saleem Fazal
by Emma Archer
by multiple authors